Catholic Charities Case Poised to Shape Religious Tax Exemptions

The US Supreme Court is set to hear arguments Mar. 31 in a case attorneys and legal scholars say could dramatically expand eligibility for religious tax exemptions and create an uneven playing field for charitable organizations.

Catholic Charities Bureau Inc. is challenging a Wisconsin Supreme Court ruling that the group doesn’t qualify for an exemption from state unemployment taxes. The organization’s services, such as job training for people with disabilities, are indistinguishable from those of secular charities and thus aren’t religious in their purpose, the state’s high court said.

The justices appear likely to side with CCB, said Cardozo Law Professor Luís Carlos Calderón Gómez. They also could take their ruling a step further by effectively barring state authorities from assessing whether activities serve religious purposes and instead require deference to an organization’s claims, he said.

“Not being able to do that inquiry means that churches will be able to claim all sorts of things are part of the religious mission—blowing up the scope of many exemptions,” said Calderón Gómez, who specializes in tax law.

And those exemptions could widen to include organizations that aren’t churches, but pose as them to avoid disclosing political donors.

“I’d be quite worried,” he said.

Separate Incorporation

In its March 2024 ruling, the Wisconsin high court found that CCB and four of its subsidiaries are controlled by, but separately incorporated from, the Catholic Church, so the church’s own tax exemption doesn’t extend to the charities. The charities provide job training and daily living services to people with disabilities.

CCB and its subsidiaries didn’t proselytize their faith—such as distributing religious materials—indicating they weren’t operating under a religious purpose, the state supreme court held.

The charities argue Wisconsin’s exemption denial is unconstitutional in at least three ways: it violates “church autonomy by penalizing Catholic Charities because of its structure, including the fact that it is separately incorporated” from the local diocese; it impermissibly entangles church and state by having state officials answer questions of religious belief; and it discriminates among religions, as it denies the exemption to groups whose beliefs require them to help those who don’t share their faith, without proselytizing, CCB’s brief said.

Wisconsin, however, told the Supreme Court that denying the tax exemption didn’t restrict CCB’s religious practices, so the group doesn’t have a viable free exercise claim under the First Amendment. Imposing a tax also doesn’t infringe on the protected right of religious freedom, the state said.

If the Supreme Court simply decides that church-affiliated organizations can still qualify for a tax exemption despite being separately incorporated, instead of wading into the issue of whether authorities can assess what constitutes bona fide religious activities, there wouldn’t be such a huge impact, Calderón Gómez said.

Fairness Concerns

A ruling in favor of the Wisconsin Labor and Industry Review Commission would be detrimental for lesser-known religious groups trying to get tax exemptions, said Lynn A. Gandhi, a partner at Foley and Lardner LLP.

Courts may not be familiar with the practices of faiths like Tenrikyo and Jainism, and therefore aren’t equipped to determine what activities serve those denominations’ religious purposes, she said.

Gandhi also pointed to the Wisconsin legislature’s amicus brief in support of CCB, arguing that the state high court’s decision runs afoul of the exemption’s purpose.

“It’s allowing courts to, in a sense, micromanage what the state legislature passed,” she said. “Courts get to interpret the laws—they don’t get to pass the laws, right?”

On the other hand, siding with CCB would give religious-affiliated charities a “distinct tax advantage” compared to their secular counterparts, said Andrew Leahey, an adjunct professor at Drexel Kline School of Law.

If CCB gets an unemployment tax exemption but secular organizations don’t, that will put a heavier fiscal burden on the secular organizations despite offering the same services, said Leahey, a principal at Hunter Creek Consulting and a columnist for Bloomberg Tax.

“It isn’t hard to guess which group is going to be in better financial stead,” he said.

Track Record

Leahey said he thinks CCB is likely to win considering the court’s track record of siding with Christian groups. There may be a chance the court will rule otherwise “to keep up appearances,” he said.

If the justices view this as a religion case, they will probably vote along ideological lines, said Georgetown Law Professor David A. Super.

“But on tax policy, ideology has traditionally been a very poor proxy for how judges will rule,” said Super, who specializes in administrative and tax law.

Whatever the Supreme Court decides, they’ll probably depart from the Wisconsin high court’s ruling that an organization must proselytize to prove religious intent, he said. Organizations can easily game the system if they simply need to distribute religious materials like pamphlets, Super said.

The justices will want to “avoid manipulability,” he said.

The case is Cath. Charities Bureau Inc. v. Wis. Lab. & Indus. Rev. Comm’n, U.S., No. 24-154, oral arguments scheduled 3/31/25.